News: Runaway rupee alters India Inc's profit equations

(DNA 18/04/2007) Mumbai - As the rupee earns the distinction of being the world's best performing currency in April, India Inc's finance heads are bringing out their calculators to assess the damage. Or count the gains.

Companies with a high export orientation are recalculating potential revenue losses and the cost of hedging, while import-intensive sectors are rubbing their hands in glee.

Among the vulnerable industries, infotech stands out. So does pharmaceutical. As for gainers, refining companies, which use imported crude, are looking forward to exchange gains.

Early calculations show that companies like Tata Consultancy Services (TCS) and Infosys Technologies may post slower growth in profits and sales during fiscal 2007-08 if the rupee continues to remain strong.

On Tuesday, the rupee closed at 41.97 to the US dollar, well above the psychologically important threshold of Rs 42.

While TCS's chief executive S Ramadorai said on Monday that his export earnings were hedged to the extent of $1 billion, that's less than a quarter of the company's 2006-07 revenues of $4.3 billion.

Bloomberg, in fact, quoted Ramadorai on Tuesday as being a worried man.

"The way the rupee drastically appreciated in the last couple of days is definitely (a cause) of concern.'' Jayesh Shroff of SBI Funds Management agrees that the appreciation of the rupee is the biggest threat to the IT industry's profits.

According to an Edelweiss Capital study of sectors and companies in the Nifty 50 index, pharma and IT top the list of losers from an appreciating rupee, followed by aluminium companies like Hindalco and Nalco.

Says Shriram Iyer, head of research, Edelweiss: "All those who have their revenues linked to the dollar will be hit badly."

The export-oriented textiles sector could also be negatively impacted by the rupee. Says Ranjit Kapadia, head of research, Prabhudas Lilladher:

"The Indian textile industry generally operates on thin margins and the appreciating rupee has compounded its worries."

Sectors that are neutral to the rise or fall of the rupee include large segments of the construction and FMCG industries.

On the other hand, high import industries like oil refineries will be positively impacted by the rupee's rise. Companies like Zee Entertainment, capital goods companies like ABB and Siemens, and Suzlon Energy - which imports key windmill compoents - are also seen as gainers.

Says Vasudeo Joshi, head of research, Man India: "Apart from IT and other export-oriented sectors, everything else will be favourably affected by the rupee's appreciation."

Such a favourable impact will not only be in the form of lower import bills but also correspondingly lower duties. Consider: Finolex Industries imports ethylene for making its PVC pipes and the annual bill is Rs 440 crore.

The company will now benefit from the appreciation of the rupee. "How much the benefit will be depends on whether the company has taken positions in the forex market," says Angel Broking's midcap analyst Girish Solanki.

To figure out the full impact of the rupee's rise, however, one needs to figure out the import intensity of a company's operations. Import intensity is the quantity of imported raw materials used per unit of finished product. Adds Joshi of Man India: "The unqualified benefit from rupee appreciation will go to pure traders."

While it's obvious which sectors and companies will feel the heat, brokerage houses are in no hurry to revise their earnings estimates for companies right now.

They are waiting for the credit policy on April 24, which will indicate whether interest rates will rise further, causing the rupee to rise further. Says Kapadia of Prabhudas Lilladher: "You cannot change the model every now and then, in bits and pieces.

We will factor in the rupee appreciation and rework our profit estimates only after the 2006-07 results are out fully."

Analysts are busy predicting that the rupee will settle down at Rs 43 by the end of 2007. Says Man India's Joshi: "Some depreciation in the rupee should happen in the third or the fourth quarter of the calendar year."